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Exploring 1 Very Attractive Business at Ventas, Inc.

By Patrick Morris – Jul 16, 2014 at 10:06AM

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Ventas runs a massive portfolio of properties used in the rapidly expanding healthcare industry. And one business could mean big things for it in the years to come.

Companies with big dividend payments always pique the interest of investors. And thanks to one very attractive business one REIT runs, it should undeniably be on the radar of many.

Ventas (VTR -0.38%) is a health-care REIT that operates a massive portfolio of medical office buildings, senior housing communities, skilled nursing facilities, and even hospitals. Altogether the 1,473 properties it owns are worth more than $21.5 billion. But there is one business that makes up more than one third of its portfolio that has a remarkable number of attractive attributes that could mean big things for it in the future.

The big business that could
The Seniors Housing Operating Portfolio, or SHOP, is a segment of Ventas that spans 237 properties across 31 states which brought in $123 million in net operating income in the first quarter with an impressive 38.8% profit margin. These properties are operated by Atria Senior Living and Sunrise Senior Living and are the housing units where many retirees find themselves.

In June, Ventas announced it had acquired 29 SHOP assets in Canada for $900 million, and additional properties from its $2.6 billion acquisition of American Realty Capital Healthcare Trust, which will bring its total investment in SHOP properties to over $8 billion. But one of the most impressive things about the properties is the opportunity that awaits for them.

The reason for optimism
At a recent presentation Ventas dove into the underlying details of not only its properties, but the areas in which they are located. One of the most fascinating bits of insight was of the 20 largest markets where the Ventas SHOP portfolio is located; the median household income is 51% higher than the United States. The median household income stands at $51,579 in the United States, and impressively $77,848 in its 20 largest markets.

But it didn't just stop at the 20 largest markets, and in total, the areas in which Ventas has properties sees the median household income stand at $72,500. Again, well ahead of the national average.

And it's not just the income results which are impressive, but these areas in which its properties are located also have a median household value of nearly $370,000, more than double the $182,000 seen in the entire U.S. 

With all that in mind, you may be asking yourself, what do the areas in which it finds itself have to do with its bottom line results? As shown in the chart below, the revenue per occupied room, or REVPOR, Ventas is head and shoulders above the national average:

Source: Company Investor Relations.

While the occupancy rate dropping is something to be aware of, one quarter shouldn't change an investor's mind-set on the business. And knowing how many companies blamed the weather during the first three months of the year, it's possible Ventas experienced the same difficulties.

But the reality is that Ventas has positioned itself to ensure its properties are in areas in which they receive significant premiums over the industry average, and that is a reason for interest. This undeniably could be a reason for optimism because, put simply, it will earn more per room than its competitors, and therefore it may warrant a premium valuation.

Conversely, it must too be noted, the premium its properties claim could also mean Ventas is more susceptible to risk in the event of a market downturn.

The Foolish bottom line
Undeniably, more work needs to be done to determine whether Ventas as a whole is a business which should be bought into. But the impressive premium it earns on its rooms is a sign of the strength of the properties it owns, and is reason to explore the entire company even further.

Patrick Morris has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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